. Gantchev, N., Sevilir, M., Shivdasani, A., (2020). Activism and empire building.

Question 1

What type of firms are typically targeted by hedge fund activists in relation to empire building?

Answer 1

Hedge fund activists target firms that engage in empire-building behaviors, such as frequent, large, diversifying acquisitions and those making poor, low-return acquisitions, especially during merger waves

Question 2

What changes occur in a firm’s acquisition strategy following an activist intervention?

Answer 2

After activist intervention, targeted firms reduce acquisition activity, especially large, diversifying, or in-wave acquisitions, which are associated with value destruction. They make fewer acquisitions and improve acquisition quality.

Question 3

How do activist interventions influence divestiture activity?

Answer 3

Activists increase the pace of divestitures in targeted firms. These firms are more likely to undertake large divestitures, focusing on selling assets and reducing the number of business segments, leading to a more focused and efficient business.

Question 4

What are some of the key mechanisms through which activists influence a firm’s strategy?

Answer 4

Activists influence strategy by demanding CEO removals for poor M&A performance, implementing compensation-based incentives to reduce empire-building motives, and appointing new board members to improve M&A decision-making.

Question 5

What effect does activist intervention have on acquisition returns?

Answer 5

Following activist intervention, firms that make acquisitions see higher announcement returns compared to non-targets, as they tend to focus on better-quality acquisitions

Question 6

What is the overall impact of hedge fund activism on shareholder value?

Answer 6

Hedge fund activism improves firm efficiency, reduces value-destroying acquisitions, encourages strategic divestitures, and ultimately creates shareholder value by curbing empire-building behaviors.